Chicago-based wealth manager Cresset has rapidly expanded since emerging on the scene in 2017. In the wealth management sphere, Cresset Asset Management has expanded through organic growth and by mergers and acquisitions. At the same time, the firm has built out Cresset Partners, an investment management arm that focuses on sourcing private market opportunities for both Cresset’s clients and other advisors looking for private placement opportunities.
Within Cresset Partners sits a seasoned real estate investment arm, Cresset Real Estate Partners, that the wealth manager brought under its banner in 2021. The roots of that team go back more than 20 years with an orthodox start. Larry Levy built the Levy Restaurants chain dating back to the 1970s, eventually selling the company entirely in 2006. Along the way, Levy took some of his wealth in his family office and focused on real estate investment. From there, Levy, along with partners Michael Miller and Jeff Cherner, launched Diversified Real Estate Capital in 2003 to work with additional family offices and high-net-worth investors on new real estate opportunities. Over the next 15 years Diversified invested more than $1.5 billion to develop or acquire assets, focusing on value-add, opportunistic and development strategies.
Spurred by the creation of Opportunity Zones under the Tax Cuts and Jobs Act of 2017, Cresset and Diversified initially partnered in 2018 to launch the $465 million Cresset Diversified QOZ Fund. They later launched a second fund, Cresset Diversified QOZ Fund II.
The success of those two ventures led to Cresset and Diversified formalizing their partnership in 2021.
WMRE sat down with Michael Miller, a founder of Cresset Real Estate Partners, to discuss the partnership. Miller currently serves as executive managing director, leading the real estate team in creating and managing Cresset’s $3 billion development portfolio.
This interview has been edited for style, length and clarity.
WMRE: Can you talk about Diversified Real Estate Capital and how that business came together?
Michael Miller: Diversified was a longtime capital provider for top tier operating partners, funded by a group of high-net-worth family offices. It started from Larry Levy’s family office (Levy Family Partners). Larry owned the largest caterer of corporate suites in professional sports facilities. When he sold the Levy Organization in 2006 and became liquid, he and some of his friends with family offices wanted to invest in opportunistic real estate. Larry invited me and my partner, Jeff Cherner, to create Diversified as a vehicle for finding and funding real estate equity investments for this group of family offices. That worked well for a long time. Larry is a widely known entrepreneur nationally, and as our real estate business became more successful, we widened our group of family office investors. Diversified invested in 25 projects. It did them in different forms—value-add, acquired some property, provided development capital and eventually funded approximately $1.2 billion in equity. It’s a bit of an unusual situation to be a small shop like we were and be able to put together $50 million to $150 million checks for deals.
We decided to continue investing in single transactions, rather than funds, because we could profitably focus on institutional quality real estate of significant size and compete and create outperformance by being quicker and more flexible than institutional capital. We wanted to buy from institutions when there was value to be made or sell to institutions when the timing was right. We found it was better to chase the projects when we were competing with institutions. We didn’t necessarily have the cheapest capital, but we could be more nimble and move faster, and that allowed us to have some room to compete.
We did that and did that successfully. As the real estate markets improved after 2008, we started doing more and more deals and our appetite got bigger. As the cycle continued, more and more value-add funds started, but the development business, which we understand really [well], continued to be undersupplied with capital. Development is typically capital-short. The development portion of the cycle isn’t appealing to a lot of institutions because their capital needs an immediate cash return. A significant portion of family office capital is less focused on immediate returns and more focused on the total return benefits of holding real estate longer term. As we went on to 2013-14-15, and as the real estate cycle went on, we moved away from acquisitions and value add. We jumped into the development cycle and focused there.
WMRE: At what point did the partnership with Cresset begin?
Michael Miller: Prior to teaming up, we did all of our deals on a deal-by-deal basis, largely through single-purpose vehicles. We didn’t organize as a fund. And, frankly, our family office investors weren’t particularly interested in being in a fund. Cresset came to us because of our track record and development expertise when they read over the Opportunity Zone (OZ) legislation in 2017. Cresset asked us what we thought of the QOZ legislation, but there was a personal connection. (Cresset Founder and Co-Chairman) Eric Becker was Larry’s first intern 45 years ago.
We looked at the OZ legislation carefully and decided a couple of things. We decided there were enough well-located OZs that we could envision developing enough high-quality real estate assets to support a fund. We envisioned a fund that captured a build-to-core philosophy, where our investors would end up with a portfolio of core quality assets after development and stabilization. Core is the segment of the real estate market that has the highest returns with the lowest risk over longer holding periods. Our look at the OZ legislation and the location of the OZs that were established led us to feel like we could make investments that were in the path of growth and would end up being core quality real estate assets over the 10-year hold period mandated by the legislation.
We also realized the way the legislation was written that it was better to have a fund model than a single deal model. Investors need to invest their capital gains within 180 days of realizing the gain. If the investment goes into a fund, the legislation allows at least another 180 days, or potentially even longer, to invest that capital. If you are operating on a single-deal basis and that 180 days could run out, you lose the potential tax benefits. In the fund model, we could protect those tax benefits and develop a pipeline of assets, matching the capital coming in with the pipeline of assets we were interested in investing in. The first fund we launched was at the end 2018. Now we are onto our third opportunity zone fund.
We formed QOZ Fund I when Cresset was only a year old. It was a new wealth manager that had $3 billion or $4 billion in AUM. But they had a growth mindset. Now they’ve gone from $4 billion AUM to $30 billion AUM. And our real estate platform has grown rapidly along with Cresset.
WMRE: How large are those funds and how did that relationship evolve from an external partnership to one where the real estate entity was brought under the Cresset banner?
Michael Miller: The first two funds invested approximately $1.15 billion in equity OZs, and we are raising the third fund now. As Cresset grew on the wealth management side, their appetite for real estate exposure outside of OZs also grew. The OZ vehicle is a relatively niche product. It’s focused on the tax benefits relative to capital gains. The reason it is in place is to get capital gains off the sidelines and back into economy. We think the legislation is working well in that respect. If you look around the country, great development is being done and neighborhoods are changing and experience economic improvement. But the wealth management group had a need for other kinds of real estate and other real estate returns.
A year and a half ago, we started our first logistics fund. Cresset Logistics Fund I raised $250 million in equity and includes nine properties completed or under construction. We had been watching the industrial real estate business for a long time. Larry started his real estate career as an industrial and office developer in the 1970s, and we know that business very well. There wasn’t a niche for us in that business when it was mostly about creating smaller buildings that required less equity. With the growth of e-commerce and other factors, the logistics business changed, and tenants began requiring much larger buildings, sometimes up to 1 to 1.5 million sq. ft. Consequently, the equity requirements have gone from metaphorically passing a hat and putting together $5 million to projects that require equity in the $50 million to $60 million range. It’s gone from entrepreneurial type capital to institutional type capital over the past 10 years.
Cresset has allowed us to access an expanded investor base, including family offices and HNWIs all over the country. The platform gives us sizable capital to compete with institutions and allows our investors access to the type of institutional real estate assets and returns that they couldn’t access previously on a direct basis. Cresset’s investors are well-served competing in this space and earning some great returns where the other options to invest in logistics would be public markets or the “pass the hat” entrepreneurial deals that have more risk. So, Cresset’s wealth management platform has served our real estate platform well in the sense that it has given us access to this investor group of ultra-high-net-worth investors and family offices. We’ve grown our investor base to be a much bigger network by teaming with Cresset. We view it as the future of our business, so we formalized the platform by putting everything under Cresset Real Estate Capital flag in 2021. Today we have about 20 professionals in Cresset Real Estate arm and roughly $6 billion in real estate assets in the portfolio.
WMRE: What distinguishes what you are doing from competitors in the wealth or real estate spaces?
Michael Miller: One of points of differentiation is that we have a highly experienced asset management group with a lot of construction experience. We are not passive partners. We are active in all phases of the development and ownership process. In times like these, which are volatile in the capital markets and the construction markets, our experienced staff and large capital base gives us an edge. The development business requires a lot of flexibility. There are always changes, and many decisions that need to be made rapidly. While we have a lot of development and ownership expertise, our flat organization allows us to stay nimble and take advantage of opportunities easier than some competitors.
WMRE: How do investors working with Cresset get brought into deals?
Michael Miller: Cresset has two sides. There’s the Cresset wealth management side and then an investment management side called Cresset Partners. Cresset Real Estate Partners sits within Cresset Partners.
Cresset Partners is an alternative asset management group. The Cresset vision is that Cresset Partners includes real estate, private equity, private credit and venture capital. This gives the wealth managers, and consequently the Cresset clients, access to proprietary private deals. This is a very big focus of Cresset and one of their points of differentiation with other wealth management competitors. The private investment space is more likely to create alpha-type returns for Cresset’s investors than the public markets. Most wealth management clients don’t have enough exposure to private investments. Cresset’s mission is to build a vibrant, highly competitive private alternative asset management company that allows our investors to access these private deals and outperform other wealth managers that don’t have this access to highly profitable private investments.
WMRE: But I also assume that not all clients would necessarily be a fit. So how does that work?
Michael Miller: Cresset’s wealth management platform operates independently from the Cresset Partners platform, because our funds have to be the right fit for Cresset’s wealth management clients, addressing their portfolio needs. There are other real estate funds that those wealth management clients want to invest in, where Cresset Partner’s funds might not fit.
For example, right now, we don’t have a real estate income fund. The reason is because of where we were in the cycle and with what’s been going on, real estate income opportunities haven’t been that attractive to us. It’s become more attractive with the turmoil in the market and something we are looking at doing. However, in the meantime, Cresset wealth managers are using external real estate income funds when it is suited for clients’ portfolios. We have in-house expertise and we will look at funds and suggest which are the ones we would favor. But those are not Cresset funds. It’s the same thing we do with private equity deals and private equity funds. The wealth management group is not pushed to use Cresset funds unless they are the best use of clients’ capital and provide the best solutions for the clients.
Likewise, we will raise money for funds outside of the Cresset system. We have our longtime investors that may not be Cresset clients. We have a highly effective digital fundraising operation that uses a variety of social media and targeted online content to expose our funds to others that might want these investments. There are lots of different ways we gather client capital.
WMRE: But you are only working with accredited investors, correct?
Michael Miller: Correct. There are a variety of parameters that are required of our investors in order to qualify to invest in our funds. Cresset’s back of the house fund administration, legal, risk, compliance, reporting, etc. is market leading, and we couldn’t be more pleased with our ability to provide institutional quality services to our family office and high-net-worth clients.
Our funds have a $250,000 minimum investment and the average check is $1 million. We tend to have two groups. There’s a group that averages between $250,000 and $1 million per fund. And then there are much larger family offices. We allow the large family offices, the UHNW group to act on a co-investment basis. If they have a particular basis, they can go in side by side with us as co-GPs. Our mission is to provide our investors access to great real estate investments in a format that they desire.
WMRE: Do you find there are any particular challenges or idiosyncrasies when working with that investor base?
Michael Miller: We look at everything from the real estate side. We’re interested in doing the best real estate deals. Sometimes that fits a family office’s needs, and sometimes it doesn’t. Everything we do is intended to create core real estate when the assets are stabilized. We seek to develop core real estate, acquire core real estate, and add value to increase the quality of real estate to core, depending on the timing and relative yields for each of these strategies. Where we see value in that space, that’s where we create opportunity. Hopefully that lines up with an investor’s needs.
Today the investment climate is very volatile. We are exhibiting a lot of patience. Our senior staff has been through several real estate recessions—some you could even call depressions. We have seen this type of capital markets upheaval before. We’re very focused on being a lower leveraged investor so our real estate can survive these periods without having to go into the capital markets. It’s not a good time to sell unless you are forced. It’s not a good time to borrow. But we have mostly long-term fixed-rate debt and leverage typically below 60%. We’re not forced to do anything that would affect the long-term value of our portfolio. We’re being very patient and trying to understand, like the rest of the world, what investment metrics should be going forward.
WMRE: One thing that’s drawn some attention of late has been some entities hitting their redemption request limits. Has that caused any concern among your investor base? How do you answer questions about that?
Michael Miller: We have had a lot of those discussions. It’s interesting because our investor base is tied to the Cresset wealth management arm. A lot of what we do is educate the wealth managers on what’s going on in the real estate markets. For the people investing with us, real estate is not generally their only investment or their largest investment. They have a variety of investments they are looking at. Wealth managers help them frame what the risks are in the world today. Jack Ablin, Cresset’s chief investment officer, is a storied economist and a brilliant investor. He sets up how Cresset wants to invest on a macro, big picture level. The wealth managers use that as a guide.
It’s a little different from our former life when everyone was calling us whenever there was a hiccup in the real estate business. … Our feeling about it is that real estate fundamentals are better than capital markets. If you look at our portfolio, the office buildings are leased and there are no delinquencies. A lot of tenants are unsure they will remain in the size of space they are in, but we haven’t had anyone completely evaporate. We didn’t have a big exposure to co-working. In times like these it pays off that we were conservative in our leverage and our underwriting.
And gating redemptions is not an issue. When people invest their money in the OZ space, for example, those are 10-year investments by rule. These short-term swings don’t impact the long-term returns we expect to earn for our investors.
